(Preemptive Rights and Dilution of Ownership) Alvarado Computer Company is a small, closely held corporation. Eighty percent of the stock is held by Eduardo Alvarado, president. Of the remainder, 10% is held by members of his family and 10% by Shaunda Jones, a former officer who is now retired. The balance sheet of the company at June 30, 2007, was substantially as shown below.

Additional authorized capital stock of $300,000 par value had never been issued. To strengthen the cash position of the company, Eduardo Alvarado issued capital stock with a par value of $100,000 to himself at par for cash. At the next stockholders’ meeting, Jones objected and claimed that her interests had been injured.
Instructions

(a) Which stockholder’s right was ignored in the issue of shares to Eduardo Alvarado?

(b) How may the damage to Jones’ interests be repaired most simply?

(c) If Eduardo Alvarado offered Jones a personal cash settlement and they agreed to employ you as an impartial arbitrator to determine the amount, what settlement would you propose? Present your calculations with sufficient explanation to satisfy both parties.

Transcribed Image Text:

Assets Liabilities and Stockholders' Equity Cash Other $ 22,000 Current liabilities $ 50,000 450,000 Capital stock 250,000 $472,000 Retained earnings 172,000 $472,000